Sixth Circuit Holds: No Bad Faith Where Insurer Acted “Reasonably”
In Retail Ventures, Inc., v. National Union Fire Insurance Co. of Pittsburgh, Pa., Nos. 10-4576/4068 (6th Cir. Aug. 23, 2012), the Sixth Circuit Court of Appeals recently affirmed a judgment in favor of the insured in an insurance coverage suit, finding that a commercial crime policy covered losses arising from a data breach. Although the court ruled in favor of the insured in the coverage suit, the court upheld the lower court’s decision, reaffirming that the insurer did not act in bad faith when denying the claim.
In deciding the coverage suit, the court found the loss from the data breach “resulted directly from” a hacking scheme, and that the exclusion for loss of confidential information in the policy did not apply to the loss of customer information.
In affirming the lower court’s ruling on the bad faith claim, the court noted under Ohio state law, an insurer fails to exercise good faith when it refused to pay a claim without reasonable justification. The insured argued that, under state law, a denial of coverage is permissible only if an insurer had reason to believe that its interpretation of the policy was the “only reasonable one.” The court disagreed noting the insured’s argument would effectively merge breach of contract and breach of the duty of good faith. The court further stated that the insurer has a reasonable justification for refusal to pay because its interpretation of the exclusion provision was incorrect but not unreasonable.
The Sixth Circuit’s decision to affirm the lower courts bad faith decision in favor of the insurer demonstrates the burden on policyholders in trying to prove such claims and the court’s willingness to rule in favor of insurers when there is a reasonable justification for denying the claim.